The Strategist

Study: Digitalization slows inflation down

12/11/2019 - 08:38

Digitalization of the economy reduces the rate of inflation, says authors of the IMF’s paper. In particular, the use of new technologies can result in lower production costs (and, consequently, prices. At that, emergence of companies such as Amazon, lower entry barriers and growth of online commerce are changing conditions for competition in the markets.

According to the paper, a positive relationship between digitalization and a decrease in inflation has been observed since 2012, and on average this effect is to reduce the price growth rate by 0.05 percentage points. At the same time, a 1% increase in the degree of digitalization leads to a 1.9% reduction in the structural component of inflation. Researchers have noted difficulties with measuring the degree of digitalization and the level of inflation, which may not fully take into account the cost of digital goods and services. The first indicator was proposed to measure very conditionally - by the number of IP addresses (the new IPV6 protocol allows each device to be identified, but its use is still limited).

It is noted that digitalization leads to a smoothing of the so-called Phillips curve (reflects the inverse relationship between inflation and unemployment: the lower the unemployment rate, the higher the increase in wages and price increases). Indeed, in recent years, in many developed economies, low inflation has ben accompanied by low levels of unemployment - this is noted both in the USA and in the EU.

In general, the trend towards a decrease in inflation in the world has been recorded since the beginning of the 90s, and since the beginning of the 2000s it has remained stably low - on average about 4%. This trend is noted both in developed and developing countries, the authors indicate. Previously, digitalization has not been cited among the reasons of this process: traditionally, the list includes a change in monetary policy (with a greater emphasis on inflation targeting), as well as the impact of globalization through increased competition (here, the most important event was China's accession to the WTO), as well as an aging population.